An attack on the heart of a nation's economy

Economically, October 12 may harm Indonesia more than September 11 did America, writes Tim Colebatch.

The fanatics who destroyed so many young lives in Kuta on Saturday night were aiming their hatred at Westerners. But the shrapnel from their blast will badly wound Indonesia.

A country that once seemed to be sailing effortlessly towards becoming one of Asia's tiger economies has now suffered yet another torpedo blast, this time tearing apart one of the few bits of its economy still in perfect working order.

For a small island with only three million people, Bali has made a big contribution to keeping Indonesia going in the past five years of economic turmoil: a financial crisis sparking a depression, the fall of President Suharto, the first free elections, war and diplomatic defeat in East Timor, the fall of President B. J. Habibie, the rise and fall of President Abdurrahman Wahid, and the fallout from September 11 and the world economic slump.

Through all this, Bali retained its magnetism for travellers around the world, especially the young, and especially Australians. For Indonesia, it became more important than ever.

One statistic sums it up. Until the 1997 financial crisis, the main port of entry for foreigners arriving in Indonesia was Jakarta's international airport. ");document.write("

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Since then the international airport at Denpasar has taken over as the country's main arrival point - until Saturday night.

Terrorist attacks in New York might stop a few tourists going to New York. But the terrorist attack in Bali is likely to stop many tourists going to Bali, and for some years ahead.

Almost 1.5 million tourists a year now visit Bali, twice as many as a decade ago. In 2000, Indonesia earned more than $A10 billion from tourism, at least a third of it on Bali. Apart from a pause when Suharto fell in 1998, and again after September 11 last year, more people have kept going to the island each year.

Tourists in Bali stay longer and spend more than people visiting the rest of Indonesia. Unlike the rip-'em-out industries that dominate so much of Indonesia's economic activity, tourism in Bali was sustainable, and wealth from it was flowing right through the island's population.

On the eve of the financial crisis in 1997, a survey found that Balinese overwhelmingly thought their lives were good or getting better still - significantly more so than other Indonesians.

Over the previous three years, 42 per cent said their general household welfare had improved, 31 per cent had improved their house, 51 per cent said they had better access to medical services, and so on.

The only area in which the Balinese were becoming less confident than other Indonesians was on law and order.

Bali was evolving into a wealthier, Westernised society. Balinese women generally married in their 20s, while other Indonesian girls married in their teens. They now average just two children each, and form part of a workforce in which an extraordinary 69 per cent of all people aged over 10 have a job (compared with 57 per cent in the rest of Indonesia).

Those working as employees generally had higher incomes than those in the rest of Indonesia. In Bali, even in 1995, nearly all homes had electricity and covered floors. Most also had televisions and radio-cassette players. Most unusually for Indonesia, almost half the homes owned fast wheels: usually motorbikes or scooters, but also a significant number of cars. The Balinese were doing well.

That has been unusual in a country that since 1997 has been going through what can only be described as a depression. Indonesia's output is only now - five years later - getting back to the real level it was at when the financial world discovered that its family-based entrepreneurs had borrowed heavily in foreign currencies without hedging. For Indonesia, life has never been the same since.

Suharto was corrupt, but he generally made wise economic decisions, and, as one wit put it, the Suhartos' corruption was market-friendly. They demanded a stake in return for helping new enterprises get under way, whereas in the Philippines, the Marcos family and friends simply looted the country of all the wealth that might have been used to get new enterprises under way.

By 1997 Indonesians enjoyed a real output per head three-and-a-half times its 1970 level. Growth per head had averaged almost 5 per cent a year for a generation, and most Indonesians had become much better off. Those who once walked had bikes, those who formerly had bikes now rode motorbikes, and people had become well fed, better educated and increasingly healthy. But those unhedged borrowings unhinged the economy, the president, and the whole country.

In 1998 Indonesia lost its president, 15 per cent of its gross national product, and much of its savings, which were sent abroad by the Chinese-Indonesian commercial elite, panicked by the outbreak of race-based rioting and rape.

Much of that money has never come back, and many of the entrepreneurs have also left, some of them for Australia.

The International Monetary Fund estimates that this year, despite growth puttering along at 3.5 per cent, real output per head will still be almost 10 per cent below its 1997 peak.

The closure last week of yet another factory producing Nike shoes sums up the malaise of a country that has reformed enough to disorientate everyone, but not enough to carve out a new direction.

President Megawati's hands-off leadership style has brought political peace after years of turmoil, but not an economic new start. The courts have moved from being under the control of the government to being under the control of the highest bidder, in a country in which, as commentator Michael Backman points out, a district court judge is paid less than a chauffeur. So investors are staying away.

So much needs to be done to reform the way Indonesia works. The Kuta tragedy has raised the urgency of doing it.

Tim Colebatch is economics editor of The Age.E-mail: tcolebatch@theage.com.au